The ACA's "Cadillac" Tax Versus a Cap on the Tax Exclusion of Employer-Based Health Benefits: Is This a Battle Worth Fighting?

The so-called “Cadillac tax” is designed to tax health benefits over specific dollar amounts for individuals and families.

Repealing the tax, which represents a large source of funding for the Affordable Care Act’s (ACA) coverage expansions, without creating a workable alternative would reduce federal revenue by $87 billion over a ten-year time period.

The Issue

In recent weeks, presidential candidates from both major parties have called for the repeal of the "Cadillac" tax, following calls for repeal from members of Congress, labor unions and employer groups. Starting in 2018, the tax equals 40 percent of the cost of employer contributions to health benefits above specified thresholds, which will be indexed to inflation, for individuals and families.

Experts analyze implications of the tax and its potential repeal by comparing it to a possible alternative: replacing the tax with a cap on the amount employers and employees can contribute to their health insurance premiums tax-free.

Key Findings

Without an agreed-upon replacement for the revenue that has the same cost-containment properties, eliminating the Cadillac tax would endanger the financial soundness of the ACA.

A cap on the tax exclusion of employer-based health benefits represents a viable alternative to the Cadillac tax.

In a period of intense partisanship, it would be a risky gamble to expect bipartisan cooperation to quickly pass an alternative to help fund the ACA’s Medicaid expansion and marketplace tax credits.

Conclusion

Both the Cadillac tax and one possible alternative—a cap on the amount employers and employees can contribute to their health insurance premiums tax-free—represent viable options to fund the ACA coverage expansions while containing health care costs. However, it would be easier and less risky to keep the Cadillac tax as opposed to trying to gather political support to replace it once repealed.

About the Grantee

The nonprofit Urban Institute is dedicated to elevating the debate on social and economic policy. For nearly five decades, Urban scholars have conducted research and offered evidence-based solutions that improve lives and strengthen communities across a rapidly urbanizing world. Their objective research helps expand opportunities for all, reduce hardship among the most vulnerable, and strengthen the effectiveness of the public sector. Visit the Urban Institute’s Health Policy Center for more information specific to its staff and its recent research.